Amazon (AMZN) stock is currently about 6% shy of its 52-week intra-day peak of $201.20 reached on July 8. Following a second-quarter revenue miss and less-than-rosy guidance for the third quarter, the stock closed at a low of $161.02 on August 5, but has staged a comeback ever since, closing Monday’s trade at $189.07. Although the strength in its cloud business–Amazon Web Services (AWS)–continues to cast a halo on the rest of its services, experts opine that Amazon may be ceding market share to Microsoft’s fast-growing cloud platform, Azure. The ballooning costs for Amazon’s ambitious Kuiper satellite internet project triggered an analyst downgrade on fears that it could slow down the pace of margin expansion. With third-quarter earnings slated for release on October 31, should investors buy into Amazon stock now, or wait to see how the earnings pan out? What are the metrics investors should look for in Amazon’s upcoming earnings print? What is the long-term outlook for Amazon stock?
Amazon Earnings: Historical And Recent Performance
Amazon has outperformed earnings estimates over the last four quarters by a wide range of 18% to 59%. The highest beat was in the third quarter of last year.
Sources: Company Press Releases, Seeking Alpha
Amazon had a revenue miss in the most recent second quarter, following revenue beats in the previous three quarters. A beat by $3.7 billion in the fourth quarter of 2023 marked the best revenue outperformance.
Sources: Company Press Releases, Seeking Alpha
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Factors To Consider Before The Earnings Report
1. Is Amazon likely to beat analyst estimates in the third quarter?
Amazon is scheduled to release its third quarter results on October 31. Analysts expect Amazon to report EPS of $1.14 on revenues of $157.2 billion, representing increases of 21.3% and 9.9%, respectively, from year-ago numbers.
Amazon guided third-quarter net sales to be between $154 billion and $158.5 billion, representing 8% to 11% growth from year-ago numbers of $143.1 billion. Since, the midpoint of this range was below the consensus estimate, the stock sank to a low of $161.02 on August 5. Although the stock has staged a nice recovery since then, it is yet to revisit its July 8 intraday high of $201.20. Amazon sees third-quarter operating income of $11.5 billion to $15 billion vs. year-ago $11.2 billion.
In the third quarter of 2023, Amazon beat its own guidance, outperformed EPS estimates by a whopping 59% and revenue estimates by $1.6 billion, but the mid-point of its fourth-quarter revenue guidance of $160 billion to $167 billion fell below the consensus of $166.6 billion. Yet, the stock rallied 35% from its October 26, 2023 (third-quarter earnings release date) closing price of $119.57 to end trade at $161.26 on Jan 29, 2024 (just ahead of Amazon’s fourth-quarter earnings announcement on February 1).
Amazon’s third-quarter results typically benefit from the Amazon Prime Day, a 48-hour shopping event held usually in July with excellent deals for shoppers seeking good bargains. Amazon’s upcoming third-quarter earnings print will include sales from the Prime Day 2024, which the online retail giant called “its biggest Prime Day shopping event ever, with record sales” but did not quantify.
However, competition is catching up with Amazon’s revenue drive. The Prime Day has spurred other retailers to jump in with their promotions. Adobe Analytics estimates that online shoppers spent an estimated $14.2 billion across U.S. retailers in the July two-day period this year, up 11% from last year’s $12.7 billion.
Amazon beat its own revenue guidance and analysts’ revenue estimates in three out of the last four quarters. A third-quarter earnings beat is likely in the cards, given Amazon’s EPS beats for four quarters in a row and just one miss over the past eight quarters. However, past performance holds no guarantees for the future.
2. Cloud Market Share: Is Microsoft’s Azure growing faster than AWS?
According to data from Synergy Research Group, which tracks IT and cloud data, Amazon remained the market leader among cloud providers during the June-2024 quarter with a 32% market share, followed by Microsoft at 23% and Google at 12%. Comparing this to December quarter numbers of 2020, AWS had a 31% market share vs. Azure’s 20% and Google Cloud’s 7%. Azure and Google Cloud have grown market share at a quicker pace since 2020, but not at the cost of AWS.
It is also encouraging to see that second-quarter 2024 enterprise spending on cloud infrastructure services rose 22% year over year to $79 billion worldwide, marking the third consecutive quarter of year over year growth of 20% or more, thanks to generative AI.
As for revenues, Microsoft’s Intelligent Cloud group, which includes Azure revenue, reported $28.5 billion in revenue for the June quarter, up 19% year over year, while operating income for the segment rose to $12.9 billion, from $10.5 billion in the year-ago period.
Amazon reported AWS sales of $26.3 billion, up 19% year over year. AWS operating income was $9.3 billion vs. year-ago $5.4 billion. Google Cloud reported sales of $10.3 billion up 29% from the year-ago period. Operating income for Google Cloud rose to $1.2 billion from $395 million last year.
The catch here is Microsoft does not break out Azure dollar figures separately. So, it’s a bit complicated to understand Azure consumption. However, Microsoft has updated its reporting structure, under which the new Azure number is expected to now align more closely to its consumption business. This could pave the way for a better comparison process with AWS.
3. Amazon Stock Outlook: The Perceived Growth Drivers And Catalysts
Amazon stock is a bullish bet for the long term and here are factors that are expected to stimulate growth forward.
- Prime Video ads should drive growth in online advertising revenues amid rising viewership and rollout in additional geographies in 2025.
- Accelerating revenue growth, strong backlog, amid increased enterprise spending on infrastructure modernization to act as tailwinds for AWS.
- Satellite Internet Project Kuiper presents a compelling market opportunity despite a looming FCC timeline, ballooning costs and Starlink competition.
- Amazon’s AI growth can come from home-grown processors, with businesses seeking improved price-performance alternatives.
- New rules targeting China shipments may favor Amazon’s e-commerce business
- Amazon Prime Day and the key holiday shopping season are near-term and perennial catalysts.
Key Metrics to Look For in Amazon’s Earnings Report
1. Operating Margins
Profitability has always been a sticky point with Amazon. The focus has been on growth vs. profits. Operating margins have never touched double digits until the first quarter of 2024, prior to which the best number was 8.2% for the first quarter of 2021. In the first quarter of 2024, operating margin rose to 10.7% from 7.8% in the fourth quarter, thanks to CEO Andy Jassy’s cost-cutting initiatives and stronger performance of higher-margin businesses like advertising and cloud computing. In the second quarter of 2024, operating margin was 9.9%. For the third quarter, operating margin is expected to be between 7.3% and 9.5% based on operating income guidance of $11.5 billion to $15 billion, on net sales of $154 billion to $158.5 billion.
2. Advertising Revenues
The resurgence in digital advertising amid the beginning of the Fed rate easing cycle and inflation moderating close to the Fed’s targets, should continue to power Amazon’s advertising revenues. Brands cut back on advertising spend in 2022, after inflation reached the highest levels in four decades and the Fed began to hike rates as an inflation reduction measure.
Amazon’s ad revenues have grown more than 20% year over year during the last six quarters. For the first and second quarters of 2024, ad revenue increased 24% to $11.8 billion and 20% to $12.8 billion, respectively, year over year.
In its June earnings call, Amazon said that it added more than $2 billion in advertising revenue year over year and generated more than $50 billion in revenue in the trailing 12 months. The online ad business is small compared to Amazon’s online retail business, but growing at a solid pace, and will remain a key contributor to profitability in the North America and international segments.
Amazon competes against Facebook parent Meta and Google parent Alphabet, which continue to dominate the digital ad space. Meta’s second-quarter sales, the bulk of which is generated from advertising, rose 22% year over year to $39.1 billion, while Google reported second-quarter ad sales of $64.6 billion, up 11% from the year ago period. Ad sales in the YouTube division rose 13% to $8.7 billion. Events like the Paris Olympics and elections in the U.S have fueled ad spending in 2024.
Sponsored ads drive the majority of Amazon’s advertising revenue, while an expansion into Prime Video ads earlier this year will set the stage for future growth. Amazon is leveraging AI to improve the relevance of ads and in improving measures that allow brands to see the returns on their ad spend. Going forward, advertising on Prime Video will be an integral part of the digital ad business model, as it gives large advertisers a platform to pitch a product or service before a huge and growing audience. Amazon Prime Video viewership in September rose 12%—recording the strongest monthly growth in September among streaming platforms–thanks to Thursday Night Football and The Rings of Power, according to Nielsen, which specializes in audience measurement, data and analytics.
However, Amazon will keep the ad loads lighter on Prime relative to linear TV and other streaming TV providers, as well as provide an ad-free streaming option for subscribers for an additional $2.99 per month.
In 2025, Amazon plans to roll out Prime Video ads in Brazil, India, Japan, the Netherlands and New Zealand complementing its current presence in the U.S., U.K., Australia, Austria, Canada, France, Germany, Italy, Mexico and Spain.
3. AWS Performance
Amazon is positioning AWS to serve the strong demand across both generative AI and non-generative AI workloads, as businesses migrate from on-premise infrastructure to the cloud amid robust enterprise spending on cloud infrastructure services.
AWS is at an annualized revenue run rate of more than $105 billion with second quarter revenue of $26.3 billion growing 18.8% year over year, accelerating from the 17.2% year over year growth in the first quarter, and 13% year over year growth in the fourth quarter of 2023. Thanks to Amazon’s cost discipline, AWS reported an operating margin of 35.5% for the June quarter vs. year-ago 24.2%.
The AWS backlog was a whopping $156.6 billion at the end of the second quarter, up about 19% y-o-y. So, it is not surprising that Amazon’s capital investments for the second half of 2024, will be higher than the $30.5 billion it spent in the first half, and a bulk of that spending will be directed towards AWS infrastructure.
4. Project Kuiper Updates
Project Kuiper is Amazon’s ambitious initiative to establish a satellite internet network to provide high-speed internet to underserved and unserved regions globally, by launching 3,236 satellites into low Earth orbit.
A new report from Space industry consultancy Quilty Space, says the costs for Project Kuiper may be spiraling way beyond Amazon’s estimate of $10 billion to a staggering $16.5 billion to $20 billion. While this may not seem particularly concerning in view of Amazon’s trailing 12-month free cash flow of $51.4 billion (adjusted for equipment finance leases), which has surged by 664% year-over-year–it remains a noteworthy figure.
A more pressing challenge for Amazon is the Federal Communications Commission (FCC) license, which stipulates that at least half of the satellites need to be deployed by mid-2026. To comply with the FCC’s 2026 deadline, Amazon and its partners must push launch rates to unprecedented levels within the realm of private space operations. Quilty believes that the reliance of Amazon on all-new launch vehicles may also be an impediment to the launch, and Amazon may have to likely seek an extended timeline from the FCC.
Even before Project Kuiper can get off the ground, it already has competition from Starlink, which has over 6,000 satellites in orbit. Starlink is a subsidiary of Elon Musk’s SpaceX. Despite SpaceX’s head-start advantage, there’s no stopping Amazon from making a market for itself. For one, AWS supports a third of the globe’s internet infrastructure, benefiting Kuiper with a pre-existing customer base unlike Starlink that had to build its subscriber base from ground up.
Amazon launched its first two prototype satellites on October 6, 2023, and reported achieving 100% success. Amazon will begin deploying its satellite constellation in early 2025 and rolling out the commercial service later in the year.
In its second-quarter earnings call, Amazon said that overall North America segment operating margin decreased slightly due to increased second-quarter spend in some investment areas, including Kuiper, kicking off a debate among analysts on Kuiper’s impact on operating margins. The concerns may appear slightly exaggerated because the North America segment operating margin for the second quarter was 5.6%, up 170 basis points year over year and down 20 basis points quarter over quarter. But the concerns are justified, as analysts estimate Kuiper spending to generate losses of up to $1 billion in the December quarter, up from $600 million in the second quarter. The losses could balloon to an estimated $5 billion to $6 billion next year, before the service starts to generate any meaningful revenue.
However, Amazon declined to quantify the incremental investment for Kuiper in the second quarter earnings call. Investors can watch if it provides some color in the third-quarter earnings call.
Quilty estimates that Kuiper can help Amazon generate $36 billion in annual revenues, if it can reach 100 million subscriptions at an average monthly ARPU [average revenue per user] of $30. The estimate appears quite conservative compared to the $4.2 billion in sales generated by Starlink’s 2.3 million paying users in 2023, implying about $1,826 in ARPU.
Amazon has secured partnerships with prominent telecom providers such as Verizon, Vodafone, and NTT, setting up Kuiper to deliver connectivity services for airplanes, ships, and other mobile platforms.
According to the Quilty report, beyond Kuiper’s role as an internet service provider, If it can be positioned additionally as an alternative to Global Positioning Systems (GPS) and customized to deliver positioning, navigation, and timing (PNT) services, it could significantly enhance Kuiper’s value for military and commercial applications.
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5. AI Business Updates
Amazon said its AI business is growing dramatically with a multibillion-dollar revenue run rate, although it is still in the early stages of growth. Where the tech leader has lagged in AI innovation, it is compensating by growing its own customized silicon – a grassroots technology that powers AI.
Amazon’s homegrown AI chips Trainium for training AI models is witnessing significant demand, because it is more cost-effective than Nvidia’s chips and touted to deliver competitive performance.
Amazon is not the new kid on the block when it comes to chipmaking. For years, it has been making Graviton chips for general purpose computing tasks. Amazon says its latest Graviton4 outperforms other x86 processors at 20% lower price points, while customers enjoy 40% to 50% price performance gains, use less electricity and improve carbon footprint.
It was five years ago that AWS began to focus on developing AI processors, amid tight supply because there was primarily a single provider (implying Nvidia), and customer expectations for better price performance. Amazon built its own chip Trainium for training deep learning models, and Inferentia, its inference chip.
In a recent development, startup Databricks plans to use Amazon’s Trainium AI chips in a service designed to help companies customize or create their own AI models, under a five-year deal between the two companies. This could cut costs for businesses seeking to build their own AI capabilities, because Amazon’s AI chips are cheaper. Amazon touts that its AI chips cost 40% lesser vs. other hardware offerings.
Startup NinjaTech AI, which builds AI agents, uses Amazon’s Trainium processors. NinjaTech AI says it serves more than a million users a month at a cloud-services bill of about $250,000.month vs. the $750,000 to $1.2 million that would have been the cost had it deployed Nvidia’s GPUs.
But Amazon has made it clear it will continue its partnerships with Nvidia, Intel and AMD, alongside offering its own processors for some differentiated capabilities, acknowledging that not all workloads will work better on its own processors.
AWS plans to launch the next version of its Trainium processors by the end of this year.
6. Amazon’s Retail Revenues
Amazon remains the largest online retailer in the U.S. and still generates a bulk of its revenues from its legacy retail business, which has come under pressure because of the exploding growth and popularity of Chinese shopping apps like Temu and Shein.
Temu is an online marketplace operated by Chinese e-commerce company PDD Holdings, while Shein is part of AliExpress, a China-based online retail service. Both Temu and Shein typically deliver products directly from manufacturers to American customers, at ultra-low price points, undercutting competition. Their growth is attributed mainly to a trading loophole called the ‘de minimis’ rule that exempts packages valued under $800 from custom duties and taxes. The rule has opened the floodgates for low-value deliveries, catapulting the volume of de minimis shipments to over a billion in 2023, from approximately 140 million in 2013, based on White House estimates. Each package has a value well below $800, making it eligible for the de minimis exemption.
In June 2023, the Select Committee on the Chinese Communist Party released a report that noted that Temu and Shein alone are likely responsible for more than 30% of all packages shipped to the United States daily under the de minimis provision, and likely for nearly half of all de minimis shipments to the U.S. from China.
The U.S. has proposed fresh regulations to address the misuse of the ‘de minimis’ rule and to eliminate the special customs exemption for the low-value Chinese shipments that currently face tariffs from the U.S. This includes 70% of textile and apparel imports from China, and other products like shoes, machinery, etc. potentially leading to a drastic reduction in the number of de minimis shipments. The proposal is yet to be finalized. Reports say that the EU is also exploring similar measures against low-value shipments.
Amazon is reportedly considering its own direct-to-consumer business taking advantage of the de minimis rule, to sell items below $20.
The prime day sale in July and the upcoming holiday-shopping season are also key near-term and perennial catalysts for Amazon’s retail business.
7. Amazon’s Fourth-Quarter Outlook
Outlook for the fourth quarter will be a key metric to watch. In its earnings announcement, Amazon typically provides net sales and operating income guidance for the sequential quarter.
AMZN Stock: A Buy Before Or After Earnings?
The difference between buying a stock before it reports earnings and after is the distinction between a speculative investment decision and an informed one. Typically, stocks may experience wild stock swings around earnings announcements. The earnings of similar or related companies may also have a spillover impact on the stock price. Market mood plays a key role, as well.
Market’s reaction to Amazon’s past earnings announcements may provide some clues.
Past-Earnings-Related Amazon Stock Price Changes
Sources: Yahoo Finance, Google
Bear case:
AMZN stock lost nearly 9% of its value after it reported second-quarter earnings on August 1, 2024. So, a position after the earnings announcement would have been beneficial vs. a pre-earnings position.
Bull case:
AMZN stock gained nearly 8% after reporting fourth-quarter earnings of fiscal 2023. Even if investors missed the opportunity to invest in the AMZN stock before the earnings announcement, the stock rallied another 10% in the post-earnings period and offered further buying opportunities. While not ideal, reduced gains are better than losses.
No stock has a straight upward trajectory. It always provides several buy points along the way. So, buying after earnings reduces downside risk, while still providing gains, whereas pre-earnings purchase carries higher risk/reward. Any investing decision should be made after careful research and due diligence of the security in question, based on the risk appetite of the investors.
Typically, if the stock rallies strongly ahead of earnings, it implies overwhelming optimism on the earnings outcome. This may also lead to overpricing of the stock. There is a strong likelihood that such stocks could reverse after the earnings announcement, unless the future guidance is extremely positive (in which case the momentum may likely continue).
On the other hand, if a stock underperforms as it heads into earnings, it may imply muted earnings expectations or existing investors exiting or reducing positions ahead of earnings to avoid downside risks. In such a case, when the earnings announcement is positive, or not as negative as expected, shares tend to rally.
Ahead of Amazon’s third-quarter earnings readout, Wedbush analysts believe that investors should take advantage of the Amazon stock’s relative underperformance, given Amazon’s accelerating AWS growth and the momentum of its high-margin advertising business that render the risk-reward attractive.
Importance Of Investor Sentiment
On October 8, Cathie Wood’s Ark Innovation ETF (ARKK) bought 76,505 shares of Amazon worth around $14 million. AMZN stock is up 3.4% since then. ARKK has $5.5 billion in assets, and its five-year return of 12% is modest, at best vs. S&P 500’s 95% return in the same period.
No analysts have a “sell” rating on AMZN stock, in fact 94% of analysts covering the stock are bullish about its prospects. An average price target of $219 represents nearly 16% upside from Monday’s close of $189.07.
Less than 1% of the outstanding shares of AMZN is short, implying that investor sentiment is not negative.
Reviewing Expert Opinions And Insights
Goldman Sachs analyst Eric Sheridan expects Amazon’s third quarter earnings report to reflect relatively stable eCommerce demand, and strong performance in advertising, driven by the expansion of initiatives such as video, connected TV, and international markets, and solid U.S. eComm advertising growth. Sheridan expects continued acceleration for AWS, as previous headwinds such as the impact of cloud optimization.ease. The analyst reiterates a Buy rating and $230 price target on AMZN stock.
Wedbush analysts reiterated an Outperform rating and $225 price target for the stock. Wedbush expects Amazon’s operating income to grow at a 20% compound annual growth rate over the next five years, mainly due to its transition to higher-margin advertising, as well as AWS revenue.
Wells Fargo Securities analyst Ken Gawrelski has downgraded AMZN stock from overweight to equal weight, trimming the price target from $225 to $183—one of Wall Street’s most conservative projections. While AWS continues to thrive, it falls short of generating positive estimate revisions in the near future. Additional headwinds, including investments in Project Kuiper, rising pressures from Fulfillment by Amazon (FBA) fees, and moderating advertising contributions, are poised to cast a shadow on Amazon’s earnings growth, according to the analyst.
Bottom Line
Analyzing Amazon’s investment potential, particularly in the context of earnings announcements, leads to the conclusion that buying AMZN stock post-earnings may be a better approach. This way, investors can potentially mitigate downside risk and capitalize on asymmetric reward opportunities, benefiting from the latest financial disclosures and operational insights. Amazon Prime Day and Holiday shopping season are near-term catalysts for the retail business, while the proposal to regulate de minimis shipments may offer an enduring advantage against discount rivals.
Amazon’s AI growth may likely stem from its home-grown AI chips that may attract businesses seeking improved price-performance options. Accelerating revenue growth, and a strong backlog, amid increased enterprise spending on infrastructure modernization will act as tailwinds for AWS. Despite all the concerns about Kuiper investment costs, the satellite-internet segment presents compelling economics for long-term growth, especially for Amazon with its pre-existing customer base. The impending rollout of Prime Video ads across additional markets, combined with a rise in viewership, is likely to bolster the high-margin online advertising business, and somewhat alleviate overall profitability growth concerns. For the long term, Amazon stock remains a compelling buy.
Please note that I am not a registered investment advisor and readers should do their own due diligence before investing in this or any other stock. I am not responsible for the investment decisions made by individuals after reading this article. Readers are asked not to rely on the opinions and analysis expressed in the article and encouraged to do their own research before investing.
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